I.M. Skaugen : I. M. Skaugen SE : Preliminary Result 2011

The I.M. Skaugen Group (IMSK) today announces

The pre-tax result was negative USD10.8 mill in 2011 compared to negative USD14.3 mill in 2010. The result of 2011 on an EBITDA basis was USD30.3 mill compared to USD19.4 mill for the 2010. The pre-tax result for 4Q11 was negative USD4.7 mill compared to negative USD5.7 mill result for 4Q10. The 4Q11 result on an EBITDA basis was USD7.8 mill compared to USD4.8 mill for the 4Q10.  

In 2011 we have implemented a process to reduce our involvement in certain investments now considered non-core investments.

Going forward we focus even more on business activities which drivers are depending on Asia and other relevant emerging markets.

We have in 2011 completed our fleet renewal program. These new ships, in the Norgas fleet, have a far superior cash earnings capacity compared to the fleet we have retired. This is due to not only size, but also their operational capabilities.

Our view on the performance of the company in 2011 and the outlook for 2012

The Company is not satisfied with the overall financial performance for the year as it showed a negative result.  The operational performance is better in 2011 compared to 2010 as we have a 50% increase in EBITDA and EBIT results going from negative to positive. We also have a 1/3 reduction in net interest bearing debt and an improved equity ratio compared to the year before. About 20% of the finance costs is extraordinary costs related to delivery of vessels. The year also includes substantial one-time cost associated with new vessel delivery and commissioning, as well as cost associated with organizational adjustments. Since all these are one-time cost issues it should not effect on our performance in 2012.

We as a Company also experienced a somewhat turbulent and challenging year for all of our business activities including the core business of Norgas Carriers in 2011. This comes as an after effect of the "Great Recession" in 2008/09 and the output gap created by the financial crisis. The core business of the Company did enjoy improved trading conditions in 2011 compared to 2010 and we see this continuing into 2012.

With a succession of continuing financial crises, Governments in both Europe and the United States appear often to be at a political impasse, amidst calls for austerity, massive injections of financial aid, and strong ideological disagreements over policy.  The combined effect is low or no growth and continuing, and perhaps rising, unemployment and with social unrest as a result. This is perhaps now more of a Euro area problem than a US problem, but the significant contagion effects on finances in most areas do affect our business in both a direct and an indirect way. The challenges in financing have created additional cost for us, but it also affects our clients and their business needs.

The company took delivery of the remaining 5 of our SMC related newbuildings. The vessels were all phased into our commercial program and technical operations throughout the year. Often one will experience operational challenges with new ships for an initial period of time. The five ships delivered at the same time resulted in higher cost and more technical off-hire and some challenges in the commercial scheduling than we expect under normal operations. The combination of increased capacity and more normalized operations should improve the company's profitability in 2012.

The 16 month unfortunate retention and delay in delivery of the third Wintergas vessel, Norgas Camilla, caused direct losses of about USD10 million from May 2010, when the vessel was ready to sail  September 15, 2011 when she entered the fleet. The ending of this retention of the vessel should directly improve our future profitability.

Our specially designed "Wintergas" type vessels have contributed negatively to the results, as they have entered the spot markets at a challenging time.  Reduced volume of export from Japan and Korea compared to Chinese imports growth has been absorbed by more "long haul" business. These are "short haul vessels" specially designed for a potentially growing intra-Asian trade in North East and South East Asia. The ships are equipped with an innovative ship design combining both petrochemical and chemical capacity. Contrary to the petrochemical gas markets the markets for chemicals in Asia has been very weak. This has made it hard to utilize the combination capacity in a profitable way. The concept is new and unique, and we experience that implementation in these markets is a slower process than first anticipated.

We made major organizational adjustments in 2011. These adjustments have had a significant one-time cost of about USD 2 mill associated with it. These adjustments have seen us concentrating our human capital resources for the most part East of Suez and in Singapore. In 2011, we also closed down the shipbuilding activity named SMC and reduced the organization accordingly. We have by this achieved a reduction of shore side manpower in the group by more than a third (not including JV companies based in China and USA). This should give us a significant saving in overhead cost from 2012 onwards.

There are certain unresolved issues in China as a result of this past SMC activity that is being harmonized with third parties and we expect these to be resolved in 2012. With the exception of a possible gain on sale of all or part of the Shenghui shares we own, we do not expect this to have any impact on our profit and loss in 2012, but they should improve the balance sheet of our Company.

We have for many years invested substantial amounts of resources and money into "R&D" and business development.  It is now time to harvest and gain on many of the initiatives we have undertaken. The associated expenses have been charged to the profit and loss statement of the company and have for the most not been capitalized. With proper execution, we should be able to generate better returns due to some of these initiatives, and this should then come to the direct benefit our shareholders. These developments cover, amongst others, technology and business solutions for "Small scale LNG" transportation, development of combination ships for LNG and petrochemical gases (MG ships) and for chemicals and petrochemical gases (WG ships) as well as ship building in China. We have built a presence in the GCC region to use as a platform for further business and other efforts have been made to gain more experience in China to enable us to exploit the growth in both of these regions.

These undertakings have in sum been quite demanding for our resources, but considered needed in order to lead the business and technological innovation within our core field of interest. We will however, not be able to continue to conduct as much "R&D" and business development and expense these to our profit and loss statement in the years to come until our recent developments avail us properly.

The company currently has no CAPEX projects initiated. The new initiatives we have under evaluation are mostly tied to the LNG sector and will be considered with long term contracts.

For the years to come, I.M.Skaugen SE will continue to pursue a niche strategy in gas and petrochemical products and within the emerging markets specially the markets East of Suez.

In order to continuously benefit from this growth trend, we as a leading company with cost and service leadership as a goal will maintain our presence in the regions East of Suez, where most of our clients are based.

We focus specially on the drivers arising from the developments in China and the Gulf region of the Middle East and do this from a main base in Singapore.

International trade will continue to grow, predominantly in the emerging markets - the key regions of the Company's strategic focus.  The double digit increase in both exports and imports shows a booming trend of intra-emerging market trades which have become more crucial than their respective trades with the Europe and USA.

This makes the emerging countries more resilient to the economic crisis than in the advanced economies. One of the key regions Asia, with China on top, will continue to be a principal focus for us and it has been our focus at IM Skaugen SE (IMS) for the last decade.  With higher growth rates and the continual emergence of opportunities, Asia has an aggressive optimism that no longer exists in Europe and the United States, at least for the moment.

China remains the great "wildcard" of the region. According to the 12th Five-year Plan, the country is encouraging domestic consumption over exports, to develop the service sector, shift toward higher value-added manufacturing, conserve energy and clean up the environment. The world has witnessed the country's willingness and capability of achieving its goals. With the upcoming political shift in 2012, the new leadership is expected to be even more ambitious about their plans. Despite the tremendous growth we have seen in China, China is still a poor country which needs more development in infrastructure and improvement in social living standards especially for those in the rural areas. The massive urbanization has been a key driver for growth and this will continue. 

The rapid economic expansion in China has motivated the country to achieve self-sufficiency in many fields including the petrochemical business. Nevertheless own production at higher cost, due to the need to import naphtha as feedstock, might not be sustainable for such a large country which makes us to believe that China will face increasing need for imports from various lower cost regions to meet its growing demand.

While the increasing energy demand has created bottle necks for the country to continue the economic growth, China is opening its eyes on alternative energy sources in addition to its insatiable needs for crude oil and now natural gas as well as LNG. It is obvious that natural gas is a better and cleaner source for transportation, heating and power generation. As the urbanization process continues, China will need to supply its stranded consumers with natural gas in the form of LNG and on small scale basis due to limitations with pipeline network in the country.

As the below chart shows, China has a significant potential to reach higher volumes in order to be closer to the per capita consumption of more developed nations/regions.

Renewing the Norgas fleet - Completion of the newbuilding cycle.

Over the past 10 years IM Skaugen (and our co-investors), have built 18 gas carriers in China at a gross investment of USD570 mill. 6 of these vessels are Multigas vessels with the capability to carry LNG in addition to the petrochemical gases. This newbuilding program, now completed, makes the Norgas fleet the most efficient and modern fleet of all gas carrier operators in the world. Without the courageous steps taken to renew the gas fleet from year 2000, and by our own developed technology, we would not be able to achieve the status as the lead operator with the most advanced and a young fleet in this gas carrier business.

10 years ago the Norgas fleet counted 14 vessels at an average age above 20 year and an average size below 7,000 cbm. Most of these vessels were designed and built for "short haul" and not one vessel were similar to the other and almost all bought second hand from others. Most of these vessels also could not; or had difficulties in being used in the demanding and emerging Ethylene trades due to low and inefficient cooling capacity. Today the Norgas fleet counts 19 vessels at an average age of 8 years with average size of 9,000 cbm including the three smaller WG vessels. All but these, of the new generation vessels are designed and built by us as "long haul" carriers and have superior cooling performance compared with our peers.

Most of the vessels we now operate share the same basic cargo plant technology and design features - that enable us to harmonize operations and achieve efficiencies we have not seen before. The cooling performance is developed from the use of our own technology and this enables us to stay ahead of most of the competitors in this field.

Norgas Carriers

Global petrochemical consumption (as well as in Asia) weakened in the last quarter of 2011. The spot market ended lower both on price and volume from the higher levels as seen during the earlier quarters. For Norgas the effects were mainly due to some production difficulties experienced at a few crackers in some of the Middle East / Gulf region countries. A shortfall of nominations under our COA contracts in the Middle East / Gulf region countries impacted us negatively on the revenues due to this. Going into the first quarter of 2012, these plants are expected to resume the productions and thus the export volumes from the Middle East will normalize.

Most of the growth in the EBITDA generation from Norgas in 2011 is from increased Middle East/Gulf region export volumes continuing the positive trend seen from mid-2010 with significant volumes under our COAs in the region. Also our EBITDA growth is coming from additional ships in the Norgas fleet. An improved spot market due to increased fleet utilization throughout most of 2011 and the higher freight rates have had a positive effect on our earnings - and for the gas seaborne transportation business in general. Norgas has been operating with higher coverage by COA volumes and less ships on T/C or in the spot markets. Hence the possibility to benefit more from the spot markets was reduced. The balancing effects of this are that we are better covered with such a risk profile than if one were to be exposed entirely to this spot market.

Going forward, we believe that the capacity additions in the Middle East and continuous growing demand in China and other Asian emerging countries will continue to strengthen the long-haul ethylene seaborne transportation.

The supply of ships - the order book for gas carriers and the recycling of ships

The current world fleet of Semi-Refrigerated (SR) gas carriers consists of 277 vessels above 3 000 cbm (2,548,889 cbm).The order book for semi refrigerated vessels with cargo capacity above 3 000 cbm is currently at 26 vessels (total 240,600 cbm) and equal to about 9 % of current capacity.

132 of these SR vessels (1,162,437 cbm) have the capacity of carrying ethylene. These are for both "long haul and short haul" transportation. For "long-haul" transportation needs (above 8 000 cbm) the fleet for ethylene carriers stands at 78 vessels or 863 682 cbm capacity by the end of 2011, while the order book for the "long-haul" ethylene carriers is at 8 vessels (90,000 cbm) it equals to abt. 10% of the current capacity.

Concerning the age of the world SR ethylene fleet, the normal age for recycling of such vessels has been between 27 and 30 years of age. However at about 25 years of age it is quite normal for such ships to cease carrying ethylene and concentrate on other less demanding products to trade. There will be total of 40 SR carriers (331,103 cbm) equal to 13% of current existing capacity and 12 ethylene carriers (92 592 cbm) equal to 8% of total existing capacity, that will be over 25 years in 2012. In addition, there are certain numbers of ships below 25 years old experiencing difficulties with cargo cooling systems. And thus, the net supply of vessels could be reduced in the years to come with the current orderbook in place.

Norgas is affected by the risk of Piracy

Piracy at sea is a major threat to the wellbeing of our teams of professionals on the Norgas ships and to their families as well to the business of our clients. It is also a financial risk re our ships and thus to our shareholders. Piracy has become a well organized crime and it is now above all performed more as a "professional business" which has been "booming" during the recent years. Norgas is focused on prevention of piracy incidents through early detection and evasive tactics. To enable us to do this we depend on our professionals and their training and to acquire the best and most modern equipment that can be sourced. We have so far not yet had an incident with our vessels incurring violence or risk of capture of crew, cargo and property.

The Norgas vessels are as a matter of policy sailing in convoys and avoidance of piracy hot spots is arranged through exchange of intelligence, rerouting and route monitoring during transit. New electronic detection aids and active anti-boarding systems have been tested and installed. Now we are adding the use of new high performance radars specially sourced to detect small crafts with pirates. "Safe rooms" or Citadels on the Norgas ships have been strengthened through further developments and equipped with independent satellite communications and being upgraded with CCTV and what humans needs for several days stay at the time. The Crew training program is also in good progress and masters receive specialized training at advanced training centers. We are also testing new devices all the time which may have a deterrent effect on attacks. The Norgas vessels do not currently have armed guards onboard, but this policy is being evaluated as rules and regulations change and there are more professional such services available.

The activities to avoid piracy carry a significant cost to our operations. Costs spent on equipment, crew training, risk insurance and the cost of extra waiting time for convoys in terms of lost turn-over have amounted abt. USD 5 mill over the last 3 years. We do carry proper additional insurances to help mitigate the economic loss for the company of such possible events, but this cannot compensate for the suffering of the crew involved in such cases if they should happen. We are now also conduction training of our team of professionals to help these to manage and shoulder such an event should this happen.

The Future for us is LNG

I.M.Skaugen is beginning to transform itself also into being more of a LNG infrastructure company. With significant investments in, and efforts to develop, technology and design as well as in Business development, this will require us to concern ourselves with virtually every aspect of the LNG value chain, from transportation on sea and land to the design of port terminal facilities. The future belongs to LNG not only because it offers environmental advantages as carbon dioxide emissions are lower than piped natural gas emissions but also based on a number of sound business reasons.

One of our goals is to become an integral participant in the LNG or gas infrastructure industry. The project we have in Bahrain (BLNG) is our "proof of concept". We have in 2012 been informed in that two bidders out of 9 in the tender process have been chosen for final rounds of negotiations to build the shore based LNG terminal needed and we aim to prevail in this competition. We are offering to provide constructions and logistics for this project, however, not being a gas supplier as a part of the tender. This project with terminal will be owned and financed by a special purpose company in Bahrain with our Skaugen Gulf Petchem Company partners involved. The terminal will have a long-term contract with the government if initiated. The ships needed are similar to the vessels in the Norgas fleet.

This LNG strategy sometimes puts us into head-to-head competition with International Energy and Oil Companies. IM Skaugen must be more nimble and innovative than those companies - at lower cost and with far greater efficiency.   We will offer better, more personalized, services and at a lower price.

In November, one of our Multigas vessels was officially named "Bahrain Vision" by HRH Prince Khalifa bin Salman Al-Khalifa, the Prime Minister of Bahrain. This vessel offers a simple, safe and flexible small-scale LNG transport solution. Fitted with onboard re-liquefaction facilities, the vessel eliminates the loss of energy associated with the "boil off" gases, a maritime landmark in the transportation of LNG in the GCC region. The ship itself is a combination of Norwegian technology and Asian workmanship; being built in China, operated by a Singaporean based company that is carrying products from the GCC region, for its clients and to clients in Asia which will be operated from Bahrain.

China activities

During the last quarter of 2011, IMS has successfully taken delivery of two Multigas vessels and 5 sophisticated gas carriers in all of 2011, thus completing our current newbuilding program under the Skaugen Marine Construction (SMC) umbrella. Under the SMC project we have built 12 gas carrying vessels in China of which 9 have been retained by Norgas and 3 have been resold. Of the 9 vessels retained by Norgas, 6 of these are the Norgas unique design of LNG capable ethylene vessels and the other 3 vessels are with our unique gas/chemical design. We have decided to discontinue the SMC shipbuilding project and activity. 

The competitive environment for shipyards has changed and we believe we now can achieve our commercial objectives better by using the traditional ship yards with reduced risk profile and much less working capital required than under the SMC model.

The industry manufacturing company Shenghui Gas and Chemical Systems (Shenghui) had  EBIT results of RMB100.6 mill in 2011 vs. RMB75.8 mill for all of 2010 (RMB50 mill in Q4, compared to RMB34.5 mill in Q3). For the full year of 2011, Shenghui delivered a strong revenue growth of 25% compared to 2010. This growth materialized in EBIT margins of 11.2% compared to 10.5% in the year before. The net profit after tax margin was however weaker at 6.5% compared to 7.1% and due to the reason that the financial costs rose followed by the severe monetary tightening in China.

The company also experienced inflationary effects from rising labor cost and raw material prices during the year and also reported elevated competition in the Chinese markets that created pressure on margins of new orders. We have worked hard for the company to focus even more on the cryogenic markets in China and outside China and especially the needs for infrastructure for LNG distribution that we feel are promising. We joined the company as a shareholder in 2006 to build the cargo tanks for our series of gas carriers under the SMC project. Since then the EBIT result has increased from RMB 12 mill in 2006 to RMB100 mill in 2011 or 8 times without additional capital injection by the shareholders.  As all of our new ships are completed we at IMS, and our JV partners in Shenghui, will continue to consider the opportunities within the Chinese capital markets (full or part sale of our shares to Private Equity investors and/or combined with an IPO) in order to visualize the values that have been created.

SPT - Marine Transfer Activities

The Marine Transfer activities achieved a negative EBIT of only USD 0.3 mill in 4Q2011. We are pleased with the improved results in this quarter where the general tanker markets for aframax sized ships were weak. Out of the year 2011 we have had two reasonable performance quarters and two quarters where we did not succeed in our goal to mitigate the dramatic low returns for our crude tankers with ship to ship transfer business.

During the year 2011 the severe crude tanker market unbalance caused by rapid fleet growth of crude oil tankers continued to impact the entire tanker markets. The exposure to tanker spot market conditions yielded unsatisfactory financial results for SPT. However, the core businesses (ship-to-ship transfers) achieved more positive results which were above the expectation for the year, offsetting partly the negative result from the tanker activities throughout the year despite the tanker market condition. The new markets in West Africa, SEA and the Middle East which had been challenging in the establishment phases have begun to contribute steadily growing volumes in support services.

Going forward, SPT will retain a strong focus on its marine transfer expertise with the goal of continued improvement of the results in our already profitable markets at the same time bring the expanded markets into sustained profitability. For the LNG business, SPT will continue on devoting its knowledge and experiences, and thus secure projects globally with potentially significant returns.  We are pleased that  SPT has been engaged by clients in the GCC region to manage LNG import terminals as this is a sign of the deep know how that SPT now commands within the LNG field. During the recent quarter, SPT has also successfully accomplished the task of the very first LNG ship-to-ship transfer in the Japanese water.

Financial issues

The equity ratio at year end was 30% up from 28.5% at year-end 2010 mainly due to reduction in working capital upon completion of the SMC project and its related newbuilding of ships. The reduction in short-term liabilities was mainly achieved through repayment of bank in China and repurchase of corporate bonds.

The Company's goal is to maintain an equity ratio above 30% measured at book value of its assets/liabilities and at all time. This ratio and related key balance sheet ratios are expected to improve throughout 2012 as earnings capability will increase based on the new deliveries in 2011 of the newbuildings into the Norgas fleet. These vessels have all an improved cash earning capability compared to prior ships we have had in the Norgas activity.

The Company has for some years used bonds issued by the parent company in the Norwegian market as a primary source of its debt funding. Bond debt is thus only taken by the parent company and the JV companies we own or our subsidiaries are being financed with bank debt as their primary source of funding and against security in vessels or property. This has given us flexibility to arrange our business better and we thus aim to continue our business this way.

The Company has four bonds outstanding as follows:

Bonds	Maturity	Outstanding amount
IMSK 04	06.06.2012	NOK243 mill
IMSK09	13.09.2012	NOK150 mill
IMSK10	15.03.2013	NOK350 mill
IMSK11	29.03.2013	NOK75 mill

The Company plans to refinance all or part of IMSK04 with NOK243 mill outstanding which is maturing in June 2012.

The IMSK share

The global financial markets were constantly subjected to volatility during 2011, mostly due to turbulence caused by the European debt crisis and gloomy outlook on economic growth in OECD countries. Compared to the peer group, the IMSK stock price has been stable during the second half of the year. The stock price performance for the whole year is in line with the overall condition in the financial markets however less volatile. SEB has been actively increase the stock trading liquidity and tightening the trading spreads. Compared to the period without a market maker, the trading volumes have improved significantly.

Oslo, 16th January 2012

I.M. Skaugen SE

Board of Directors

I.M. Skaugen SE

If you have any questions, please contact:

Bente Flø, Chief Financial Officer, on telephone [phone] or by e-mail: [e-mail]. This press release is also available on the Internet at our website: http://www.skaugen.com.

I.M. Skaugen SE (IMS) focus is on Innovative Maritime Solutions and we are a Marine Transportation Service Company. Our core business is seaborne transport and logistics of liquefied gas such as petrochemical gasses and now also LNG. IMS currently operates about 40 vessels worldwide engaged in the transportation of petrochemical gases, chemicals, LPG and LNG, marine transfer of crude oil and LNG as well as LNG terminal management. We have an in house capacity for the development and design of specialized high quality vessels within our niche. We are listed on the Oslo Stock Exchange under the ticker code, IMSK.  

IMS is a global company and employs approximately abt. 2.000 people with 20 nationalities represented.

This information is subject of the disclosure requirements pursuant to section 5-12 of the Norwegian Securities Trading Act.